Senate Farm Bill’s Crop Insurance, Shallow-Loss Programs Under Fire

By David Bennett

Penton Business Media

Critics of the Senate’s proposed farm bill continue to pop up from all over the political spectrum. Both crop insurance and the “shallow loss” program – key components of the Senate legislation – are under fire following studies released in late May.

The Senate’s shallow loss program, advocated by many farm organizations, would provide producers with revenue guarantees and support levels for crops. A study released by the right-leaning American Enterprise Institute (AEI) says if adopted the program could end up costing taxpayers more than direct payments.

The study claims shallow-loss programs “are potentially expensive for taxpayers and especially costly in an environment in which grain and oilseed prices are declining from recent levels, as seems likely to be the case"

The next farm bill is expected to contain an expanded role for crop insurance. A new report from the Environmental Working Group (EWG), which has long butted heads with proponents of current U.S. agricultural programs, says that approach should be rethought.

EWG claims its analysis “shows that while crop insurance benefits, like farm subsidies, are concentrated in the hands of a small number of large farming operations, premium subsidies are modest for the overwhelming majority of crop insurance policyholders. Those farm operations would be unaffected by premium subsidy limits now being debated in Congress, such as the $40,000 limit analyzed by the Government Accountability Office earlier this year. The bottom 80 percent of policyholders (389,494 operations), for instance, received subsidies worthjust over $5,000 in 2011.”

Following a presentation for congressional staffers on the shallow loss findings, Montana State University professor Vince Smith (who co-authored the study with fellow economists Bruce A. Babcock, Iowa State University, and

Barry Goodwin, North Carolina State University) spoke with Farm Press. Smith, who is skeptical a new farm bill can be passed prior to November elections, spoke on the potential impacts of the program on trade and the WTO, crop acreages, and true costs. Among his comments:

On shallow loss, trade and the WTO…

“When you deconstruct the language in the Senate bill, in effect -- even though there’s a claim that the acreage under which shallow loss payments is limited – there are so many exceptions and wrinkles, that for any given crop, most years you’ll get paid on every acre you plant if a shallow loss payment is available.

“So, these are clearly amber box programs. That is, they’ll inherently be viewed within the WTO agreements as trade distorting – domestic supports that encourage production of individual crop. And that makes them ‘amber box.’

“The key issue from a trade dispute perspective is whether or not when your subsidies of that type go up, world prices are falling. Then, you’ll lose what’s known as a ‘price suppression’ case.

“Shallow loss payments are inherently designed to go up when prices fall. They have the potential to be very substantial in a given year for a crop relative to its value.

“For all the crops subject to the shallow loss program – the five big ones: corn, wheat, soybeans, cotton, rice, along with a bunch of smaller-acreage crops – when prices go down, the payments kick in. That tends to be the exact circumstance the WTO’s Dispute (Settlement) Panel finds problems. Of all the programs, other than straight domestic price supports, the shallow loss programs are going to be viewed most transparently as problematic.”

How the bill might affect crop acreage breakdowns…

“As a result of this program, what incentives do I have to plant wheat as opposed to corn?

“That gets muddy because we have to understand the relative incentives this program will create for each crop. For large-acreage crops, it wouldn’t change incentives very much.

“But it might matter considerably more for small-acreage crops like canola or mustard seed. There, you’re essentially guaranteeing people fairly large returns in markets where prices are highly volatile anyway.

“We don’t know the answer quantitatively because no one has done serious work on that, including us. We would expect some acreage effects ... although my seat-of-the-pants guess is they won’t be very large.”

Costs, price drops, farm finances

On the study saying that “depending on structure and crop prices, these programs could cost the taxpayer as much as, or more, than the direct payments program they would replace: $8 (billion) to $14 billion a year over the next five years.”

“Shallow-loss programs have the potential to be very costly if prices move from recent high prices back towards the levels they’ve averaged over the last 15 years. Our numbers suggest the annual cost in the range of $6 billion to $7 billion for the Senate bill.

“If prices remain where they’ve been in the last four or five years, our numbers are very similar to those developed by the CBO (Congressional Budget Office). If prices stay roughly where they are now, the program would cost around $3 billion yearly.

“But if prices return to historical levels – if we ease up on the ethanol mandate, which is well within the bounds of probability – then we’re looking at very substantial expenditures and a fairly high likelihood they’ll exceed the $4.9 billion, or so, currently being spent on direct payments. If in 2013 prices move back to long-run normal levels, we’d be looking at $5.5 billion to $6 billion a year in outlays for the Senate’s shallow loss program.”

More on price drops…

“We’re not trying to tell anyone ‘gee, prices are going to stay where they are’ or ‘they’re definitely going to drop.’ But if the ethanol mandate is politely forgotten about – the current position of many in the Senate – then we’ll see substantially lower corn, wheat and soybean prices. That’s when shallow loss gets to be very expensive.

“Yesterday, during a presentation we made on the Hill, someone asked ‘will the prices assumed (in the report) for a lower price scenario cause major losses for every crop?’ The answer is no.

“Whatever the story coming from the farm groups, we looked at variable costs of production. And when you look at the costs of planting and harvesting a crop, they’re well below, on per-acre and per-bushel bases, the low prices we considered.”

On the financial health of farms…

“It simply isn’t the case that agriculture is in dire straits. It isn’t the case that even one bad year for a farm would cast it into penury unless the operation is being very poorly managed in the first place. Most farms are exceptionally healthy right now in terms of finance. The average debt-to-asset ratio is less than 9 percent nationally.

“The guys who would get the big bucks in the (current) programs, those who get 80 to 85 percent of payments, would get roughly the same amount under shallow loss. They have net worths in the multiple millions of dollars. And we’re not talking about corporate farms but about 1,200 acre corn farms in Iowa or a 5,000 acre family farm in Montana.

“Farmers aren’t stupid. They’re good business people and their financial position is actually healthier than almost any other sector in the economy right now. That wouldn’t change even if prices moderated substantially.”